That is an indisputable fact; since everything in nature is natural, and given nature is defined as everything. So. I’m sorry to break it to you, there are no werevolves (for context, see last week’s article on Vampires, Werewolves and Resoluteness). Well, unless werewolves are natural of course.

Which they might be; it’s just that the probability for humans living on Earth in the 21st century ever coming across a true shape shifting werewolf is so close to zero there really are no reasons to take the possibility into account. However, should one happen to fall into your lap…

Facts, facts, facts

(Nope, that’s not the opening scene in “Four weddings and a funeral”)

That’s the gist of Adequateness right there:

1) Reality is what it is. A is A, and all that

2) Be curious in investigate reality; just don’t get ridiculous regarding probability weights*

3) Be open to exactly what reality entails, what the empirical evidence actually tells you

* The probability of the existence of God, a tea kettle orbiting the sun or a spaghetti monster – or intelligent design for that matter – is for all practical purposes zero (at least down to the hundredth decimal place), whereas, e.g., the principles of evolution and the natural law of quantum mechanics have been confirmed in a multitude of clever experiments (and never refuted). There is nothing “50/50” or “You have your view and I mine” about it.

It’s all good and well having a great strategy, being patient enough to wait for the right moment, learning from mistakes, never going all in, being thorough and calm, exploring unexpected vantage points, avoiding hubris and biases, not to mention being rationally resolute.

However, if you fall prey to superstition or start assuming instead of investigating all your hard work will be for naught. It’s the facts that count. It doesn’t matter how great your model is if your input is garbage. You need all your zeal and agility to collect the facts, and all the other psychological facets of TAOS to implement the facts and execute the investment. But first of all you need the facts.

I am not a rigid financials and economics professor type, claiming only cash flow and interest rates count as facts. Perhaps a bit surprising, I’m quite open to any kind of empirical evidence of relevant causal correlations in reproducible research; be it HFT trading algorithms mined by machine learning systems, or more down to earth value based methods using publicly available financial reports – or a combination.

I don’t care what kind of facts you use, as long as they are facts – and you are open to those “facts” being wrong, misinterpreted or evolving.

Oil facts?

Maybe the Cushing oil inventory level at one point was a relevant variable for the price of oil. Maybe OPEC production quotas and their communication once was important information. Maybe open speculative interest was. But now or later, maybe they aren’t. Maybe new flexible storage capacity, new exploration technology, new pipelines or zero funding costs are changing the “facts”.

Maybe even the very underlying fundamentals of production, demand, storage, transportation, energy substitutes and human speculation, aren’t that important for a prolonged period of time due to tens of trillions of dollars having been conjured from nothing over the last decade. Perhaps the machines have thrown everything out of whack and are running circles around us mere humans laughing at our feeble attempts to participate in the game.

Perhaps. Perhaps not.

Watch carefully where you are going

Investigate and analyze

the actual evidence; don’t assume

Stop, collaborate and listen

Whether the AI scenario above is relevant yet or not isn’t the issue. My message is that it’s up to you to research the relevant data for your investment style to find facts that hold water, rather than assuming heavy objects fall faster than light ones, or that high density objects fall faster even if there is no air.

If you want to pour a ton of liquid steel, you’d want to check the metallurgical facts thoroughly first. Treat large investments the same way – research what needs to be researched for your style, sizing and risk level.

Sometimes the truth hurts, but better sooner than later, better the ego than the wallet. Or in the above case, better stand corrected before than a statue after.

So, if things don’t evolve as expected, take pause to take stock of the evidence. Listen to your “adversaries” and cooperate if possible to establish the truth. Then you can apply whatever different models and methods you prefer to massage those facts into investment decisions. Your ego, your assumptions, your self-image, your status are all irrelevant to your investment prowess. The only thing that counts is the facts of your entry point and your exit point. To get those things right you have to stand back to reality, be interested in and love reality. It’s there, no matter if you want to or not.

Reality is what it is

Be curious and pragmatic

In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.

Whenever having a bad experience in the markets, or exhibiting signs of hubris after a lucky streak, refer back to these twelve ideas, thus combining your own experience with mine to maximize your investment wisdom.

Adequateness means conforming to reality, analyzing what is actually there, rather than what you’d like it to be. You can’t close your eyes to reality. Well, you can, but that won’t stop the train/lion/stock.

If you actively pursue and accept the facts you can analyze them rationally and take action accordingly. But if you stay in the denial phase for too long, panic will sooner or later hamper your ability to do anything about the fact of the hammer hitting you on the head. Hope is not a strategy based on adequateness.

Do you like the series? Do you know somebody that should read it? Tell them about it; share this post with them.

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